CVS Caremark (CVS)

Health care is one area where expenditures grow, rather than decline, with age. And while higher health care spending isn’t a good thing, and it would be great to see per capita health care spending diminish, you can’t argue with demographics.

One implication is that while most retailers increasingly will struggle, those geared toward health care could benefit. That’s why this month’s Spotlight stock is Growth Portfolio’s CVS Caremark (CVS), one of the few companies positioned to profit simultaneously from both the rise in health care spending and the compelling need to cut per capita health care expenditures.

CVS is the nation’s leader in two major health-related industries, drugstores and pharmacy benefit management (PBM). While its drugstores sell a wide variety of items, health care products are an important part of the mix. And as the leading PBM, the company plays a major role in controlling health care costs. Together, these two divisions make CVS the country’s largest diversified provider of health care services.

Over the past five and 10 years, growth has consistently been in the low double digits, a pace that should be sustainable for the foreseeable future. Yet the company trades at a discount to the market, making it one of the top defensive dynamic growth vehicles around.

It has been rumored that CVS is eager to make an acquisition, with international pharmacies near the top of the list. One admittedly long-shot possibility, which would leave CVS vertically integrated throughout the health care industry, would be the purchase of a major health care insurer like UnitedHealth. Other than for developing and manufacturing drugs, which accounts for only about 10 percent of health care spending, this would give CVS (given that other mergers likely would follow) control or near control of almost all aspects of our highly complex and in many ways wasteful health care system.

True, any company so dominant in such a critical industry would invite regulation to some extent. But the cost of such regulation would almost surely be far less than the costs plaguing our health care system today. Moreover, some subsidiaries such as health care research and perhaps the manufacture of health care equipment would be left to compete with others.

Clearly these developments are just speculations, but if they came to pass current shareholders would likely see big gains.

Meanwhile, with or without additional acquisitions, CVS remains one of the surest growth stocks around.

Stephen Leeb, PhD., The Complete Investor, www.completeinvestor.com, 866-833-2070, September 2014

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